Deutsche Bank upgraded VMware (VMW) to Buy from Hold, saying that the firm’s previous fears of a slowdown of the company’s on-premise server business have not proven to be justified.

LOWER RISK: Large companies are shifting their data to the public cloud “at a slower than expected pace” and are actually increasing the amount they invest in “on-premise IT infrastructure,” according to Deutsche Bank analyst Karl Keirstead. As a result, VMware’s licensing revenue is rising and its longer term risk has dropped significantly, the analyst stated. Noting that the company last week positively preannounced its Q2 results, the analyst expects fiscal 2018 and fiscal 2019 estimates for the company to increase.

AWS DEAL: VMware’s partnership with Amazon’s (AMZN) cloud unit, AWS, is a “win-win” for both companies, according to Keirstead. However, the analyst says that he “may be” less upbeat on the deal “than most” because there are no signs yet that companies are interested in the partnership, while the offering’s launch might be delayed. Still, the analyst says he’s “intrigued” by the idea that the partnership could eventually offer an on-premise solution from AWS.

OTHERS TO WATCH: The analyst believes that other makers of on-premise software, including Microsoft (MSFT), Oracle (ORCL), and Red Hat (RHT), are also being helped by the slower than expected transition to the cloud.

TARGET: Keirstead raised his price target on VMware to $120 from $110.

PRICE ACTION: In morning trading, VMware rose 2% to $99 per share.

 

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